This is a CU Colorado Springs student blog for the following courses: Intermediate Microeconomics and Austrian Economics.

November 3, 2014

The Federal Reserve

So lately I was pondering the role of the Federal
Reserve. I was in question over how accurate the setting
of interest rates are and the consequences it had on markets. As I read through
numerous articles and papers I realized that the Federal Reserve encounters numerous
flaws in its applications.

One finding is that as the Federal Reserve sets interests
rates it interferes with consumer behavior. The natural outcome of markets becomes
altered due to government intervention. With
low interest rates in place it will cause unnatural amount of spending, regardless
of what the market is in demand for. This
in consequence could potentially cause an artificial bubble and high inflation.
The potential effect of setting the
wrong interest rate could be detrimental in the interaction of markets.

Furthermore, the Federal Reserve’s methodology in
controlling interest rates is on the fundamental measurement of inflation.
Though there lays hard tasks in setting the interest rate accordingly to
inflation. Firstly, the problematic
scenario of predicting future interest rates. This is an issues due to the
effect of postponed inflation. The
economy can be moving in a certain direction but the measurements don’t pick up
on it until it’s too late. So we cannot have a true measurement of the current
or the inflation at any single point. Secondly the fed makes its analysis on future
inflation by accounting in aggregate demand measurements. Aggregate demand measurements does not tell you
the hidden values and does not give you a true indication of where inflation
may be heading. This means that the fed
has no accurate way of either tracking or predicting inflation and in
consequence are not able to set interest rates appropriately.

The Austrian point of view believes in interests rates
set by market demands. The market itself will find the interest rate needed to effectively
create a balance in the market. This way
it won’t interfere in the market process and the process will find its natural course.